Why Your Savings Rate is More Important Than Your Investment Return

When you’re starting out investing, it can be intimidating to know what to do. Where do you start? What stocks should you buy? Should you even buy stocks? What about ETFs or mutual funds? Savings accounts? Paying off debt?

I’m here to provide you with some much needed relief: it doesn’t matter all that much what you do. It doesn’t. Whether you make 10% per year or 1% early on in your investment life is not as important as much as how much you save.

Frugal Frank vs. Savvy Sarah

Consider two 25-year-old investors. Both make $50,000 per year — the median household income in the United States.

Savvy Sarah is a smart investor and an average saver. She manages to put away $833 per month and earn a compounded annual return of 7% per year. That’s $10,000 per year or about 20% of her after-tax income.

Frugal Frank is a terrible investor, but an above-average saver. He manages to save an extra 5% of income — $1,250 per month. That’s $15,000 per year or 30% of his after-tax income. But, he only earns the 1.8% per year offered by his local bank.

After 10 years, who has more money? Read More »